Another Setback for Struggling Redback - TheStreet

Redback (RBAK) plans a recapitalization that will keep the Internet gearmaker out of Chapter 11 -- but at a steep cost to shareholders.

On Monday the San Jose tech shop said it intends to swap some $467 million in debt for newly issued equity. The deal will keep the struggling company out of bankruptcy, but current shareholders will pay the price, seeing their stake cut to 5%. Redback shares plunged 19% on the news.

The company says it has a tentative equity swap agreement with a committee of about 20 bondholders representing two-thirds of its creditors. If all outstanding debt is converted, bondholders would acquire a 95% stake in the company.

In addition to their 5% stake, existing shareholders would get an option to buy warrants for an additional 10% of the company if the debt-for-equity swap is successful.

The refinancing plan is far from the only unhappy news Redback investors have received recently. On Friday, Redback said that dismal sales in the second quarter brought revenue down 25% sequentially to $22 million, starkly below the $31 million Wall Street was expecting.

Redback, which is due to report earnings July 16, blamed SARS and weakness in Asia for the shortfall. Investors will be watching networking rival


(JNPR) - Get Report

, which reports earnings Thursday, for signs of weakness.

Redback has about $125 million in annual sales and nothing but red ink to show for it. With annual interest costs of $25 million, the company hasn't been able to generate enough money to cover expenses.

On the bright side, Redack said Monday that its stock would continue trading on the


at least into next month in spite of its long spell below $1, which typically triggers delisting. On Monday, Redback fell 17 cents, to 74 cents.